Macroeconomic trading back in vogue

David Greenwald, principal at hedge fund Scalene Partners in Westport, Connecticut, told FX Week that investor interest in that segment has dramatically expanded over the past 12 months, while legendary macro-trader George Soros is also rumoured to have returned to FX.

Although Soros Fund Management declined to confirm that rumour last week, fund managers said Soros’ money is now focused on global macro bets.

"2003--2004 will be the years of macro trading, not unlike what we saw in the early 1990s," said David Gilmore, partner at FX Analytics in Essex, Connecticut.

Macro trading -- where dealers take positions in currencies based on an aggregation of factors such as interest rates and economic growth -- is back in vogue for several reasons. Diminishing flow levels and a downturn in M&A activity have made it easier for investors to place big-picture bets based on economic fundamentals and trade according to interest rate differentials, renewing the focus on macro trading.

Following the near collapse of Long Term Capital Management in 1998, many macro hedge funds scaled back and became more conservative, but a new generation of smaller funds has emerged, boosting the popularity of macro styles. "I expect to see a new series of names rise to replace the Soros/Tiger funds of the past," said Greenwald -- a former head of FX trading at Bank of America.

During the height of its popularity in the early 1990s, macro trading produced stellar returns -- most famously when Soros bet against the British pound, netting around $1 billion and causing the UK to be ejected from the Exchange Rate Mechanism in 1992. But dwindling returns made many funds focus on model-based trading. Models, mostly created in-house, mitigate the human aspect of trading to a certain extent as the model supplies buy and sell signals.

One example often cited to illustrate the lack of macro activity in recent years is the Swiss franc. Swiss interest rates are near zero -- the Swiss National Bank is aiming for market rates at around 0.25% -- while finance officials have suggested that economic growth in 2003 could be as low as 0.5%. However, the Swiss franc has strengthened by over 7% against the dollar since December 2002.

"The Swiss franc should be buried for a host of reasons -- near-zero interest rates, little growth, official devaluation policy," said Gilmore. "Those are macro notions."

Some of that strength can be explained by safe-haven trading triggered by geopolitical uncertainty -- but if macro trading is to return, the currency is expected to weaken.

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